Biden Ignites a $2 Trillion Arms Race Over Green Subsidies and Chips

While visiting Washington during a state visit by French President Emmanuel Macron in December, he complained that it was not in America's interest if much of Europe's industry was "just wiped out." Yoon Suk Yeol, who visited the White House on April 26, has warned that a widening “economic war” of subsidies and tax benefits could leave all nations worse off, as he warned of a growing economic war.

‍

During their remarks, both men expressed concern over the international fallout that has resulted from the US-China rivalry and the Made in America initiatives of President Joe Biden. Among the most exposed countries to Biden's two-pronged agenda of supporting strategic industries such as electric vehicles, semiconductors, and artificial intelligence - both of which are important trade and security partners for the US - are Europe and South Korea. As part of this agenda, China’s efforts to make advances in these same fields for military purposes are being hampered as well.

‍

America is already warping global supply chains as a result of its new muscular industrial policy. The combined legislation that Congress approved last year provides approximately $420 billion in funding to incentivize the domestic production of chips and clean-energy technologies in the country. The federal government will spend about $2 trillion over the next 10 years on public works in the US as a result of the infrastructure bill that Biden signed in 2021 that mandates all iron, steel, and other construction materials used in public-works projects be manufactured in the US.

‍

All this cash sloshing around, whether it is intended or not, has the unintended effect of making overseas businesses feel drawn toward the US for the purpose of tapping the funds available under the Chips and Science Act and the Inflation Reduction Act (IRA). Northvolt AB, a Swedish manufacturer of batteries, has said that it will prioritize expansion in the US over Europe as part of its expansion plans. Volkswagen AG, the German manufacturer of vehicles, announced in March that it would build a $2 billion factory in South Carolina for its new electric Scout brand, describing the incentives on offer as akin to a "gold rush."

‍

Among the consequences of the Biden administration's efforts to integrate domestic and foreign policy into a modern industrial and innovation strategy that creates jobs at home while projecting American strength abroad, is the diversion of corporate investment. National Security Advisor Jake Sullivan has referred to this as "a modern industrial and innovation strategy." The Washington administration is willing to use both sticks and carrots to achieve its goals. Export controls have been described as a "new strategic asset" by Sullivan for the purpose of imposition of costs on adversaries in the name of national security.

‍

The result of all this is that South Korea, whose largest trading partner is China, risks getting whacked on at least two fronts as a result of these developments. SK Hynix Inc., the world's two largest memory chip makers, was granted a one-year reprieve from US export controls on their supply of advanced semiconductor technology to China. This includes Samsung Electronics Co. There is still no clarity as to what will happen when this program runs out in October of this year.

‍

As Seoul has also expressed concern over the possibility of Hyundai, as well as other South Korean car marques, being penalized by the IRA because they are not manufacturers of electric vehicles in the US, which means that their models are ineligible for federal tax credits on the purchase of electric vehicles. While Yoon was in Washington, he was accompanied by the presidents of Samsung and Hyundai Motor Co. who were part of a large delegation of senior business leaders.

‍

The CEO of South Korea Yoon warned that supply chains are being upended by a race around the world to build out cutting-edge manufacturing facilities, with each country “sparing nothing” to bring industry home. Yoon made it clear in March that South Korea was planning on joining the game by investing 550 trillion won ($413 billion) in public-private partnerships in chips, batteries, robots, electric vehicles, displays, biotechnology, and more.

‍

Seoul isn't the only one compelled to bend to Washington's will or respond in kind by its governments: From The Hague to Tokyo, governments are compelled to do the same. During the weekend of April 18 and 19, the European Union approved a €43 billion ($47.2 billion) Chips Act that opens the door to state funding for companies such as ASML Holding NV, a Dutch manufacturer of chip-making equipment whose exports to China have been curtailed by America at its request. Aside from this, the EU has also arranged for massive subsidies to be paid to offset the impact of the IRA, which will provide close to $370 billion in funding to help the Biden administration meet its climate change targets. During Justin Trudeau's tenure in office, the Canadian government offered incentives worth C$13 billion ($9.5 billion) over a decade in an attempt to land a Volkswagen battery plant that could have headed to the US.

Taiwan Semiconductor Manufacturing Co., a leading manufacturer of advanced chips located in Kumamoto Prefecture, has made it known that it will seek the government's help in paying for about half the $8 billion cost of a new fabrication plant it plans to build there in the near future.

‍

Despite Seoul's willingness to cooperate with the United States on issues of national security, Korean private companies still express concern over what are seen to be "discriminatory" elements in Biden's policies. As Wonho Yeon, a representative of the Korea Institute for International Economic Policy, explained at the Wilson Center forum held on April 18 to commemorate Yoon's visit, there is still “deep concern” among Korean private companies.

‍

Xi Jinping, the Chinese president, has recently urged on Chinese tech companies, saying innovation is one of the keys to achieving “high-level technological self-reliance.” The Chinese government has recently increased its efforts to promote its semiconductor industry due to what it describes as US efforts to “containment.”

‍

In his remarks at the April 18 event, Miyeon Oh, director of Korea Studies at Johns Hopkins University’s School of Advanced International Studies, said that third countries face a dilemma in maintaining a balance between domestic politics and foreign policy as China and the US both engage in “this new economic statecraft.” She said that “frictions” between allies, including over the IRA, should be viewed as part of a learning process, not a disagreement.

‍

It is at least possible for the EU, Japan, and Korea, with their deep pockets, to go somewhat close to matching what the US does. Others may not be able to. In response to the IRA, the UK, which is suffering from a sputtering economy, does not have much new funding available.

‍

Several months ago, Adam Posen, president of the Peterson Institute for International Economics, published a lengthy critique of Biden's industrial policy in Foreign Policy, claiming that it was "ultimately self-defeating because it was based on four profound analytical fallacies: self-dealing is a good thing; self-sufficiency is a reasonable goal; more subsidies are a good idea; and local production is what matters."

‍

The administration appears to be tweaking its policy to address some of the concerns raised by allies in response to some of the concerns raised. Tokyo and Washington reached a deal in March to allow critical minerals sourced in Japan to qualify for IRA subsidies, despite both countries not having a free-trade agreement (FTA) with each other. After initially criticizing the US measures, the EU, which has since tempered its criticism, is in the process of trying to reach a similar agreement. (To qualify for incentives offered in the IRA, automakers must not only build their EVs in the US but will also need to certify that components come from the US or FTA partners.)

‍

A loophole has been created into the IRA that allows Hyundai to access full US subsidies for rental and leased electric vehicles, a market that makes up more than 25% of the company's sales in the US, as part of the Biden administration's efforts to be accommodating. A statement of intent has been submitted by Samsung indicating that the company will be tapping subsidies as part of the building of its advanced plant in Texas, which is set to begin production in 2024, as reported by the Dong-A Ilbo newspaper on April 19.

‍

A certain irony does not go unnoticed by Yoon when it comes to the fact that South Korea was always considered the country most at risk from Xi's industrial master plan for China when it was unveiled in 2015. During the presentation of the blueprint, called "Made in China 2025," Beijing emphasized its intention to lead the world in a number of future-oriented sectors, such as robotics, pharmaceuticals, and aerospace. With its focus on "self-sufficiency", the country suffered a deterioration of relations with the United States, Europe, and Asia as a consequence.

‍

It appears that the US strategy laid out by Sullivan has echoes of that plan, with the aim of ensuring America maintains and defends its leadership in three areas that are seen as "force multipliers": computing, which includes chips and artificial intelligence, clean tech, as well as biotech and biomanufacturing, which will be the next area of focus for the administration. There is a risk, however, that it could have similar alienating effects as well.

‍

During his campaign for reelection next year, President Biden is already touting how these policies have created thousands of new jobs in the US as a result of these policies. Call it “Made in America 2024.”